Non-linear adjustments on the excess sensitivity of consumption with liquidity constraints

Dooyeon Cho and Dong-Eun Rhee

Applied Economics, 2017, vol. 49, issue 41, 4180-4187

Abstract: This article investigates the role of domestic credit markets in explaining the excess sensitivity of private consumption to disposable income using heterogeneous panel data of 19 OECD countries over the last two decades. We find that the degree of the excess sensitivity has decreased as the liquidity constraints of households have been alleviated: the estimated time-varying coefficients for the marginal propensity to consume vary between 0.16 for the countries with low liquidity constraints and 0.38 for those with high liquidity constraints. We also provide evidence that the excess sensitivity has been more prominent after the global financial crisis in some advanced countries, such as Japan, Spain, and the United States, where sharp deleveraging of households has been ongoing.

Date: 2017
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DOI: 10.1080/00036846.2016.1276279

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